by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

MORTGAGES; INSURANCE REQUIREMENTS: Requirement in second mortgage requiring mortgagor to maintain fire and extended coverage insurance "in the full amount of the above described mortgage note" clearly only required insurance in the amount of the note secured by the second mortgage, and not also in an amount sufficient to pay off the first mortgage.

Paddison Builders, Inc. v. Turncliff, 672 So.2d 1133 (La.App. 1 Cir. 1996).

First mortgage was in the amount of $168,000, and the second in the amount of $150,000. The mortgagor carried insurance of $266,000. Interestingly this issue arose prior to any loss occurring, because the junior insisted on higher insurance coverage. The mortgagee, after demanding numerous times that the mortgagor acquire more insurance, declared the mortgage in default and instituted a foreclosure action. The mortgagor responded by seeking to enjoin the foreclosure The trial court found for the mortgagee, refusing to grant the injunction, and the mortgagor appealed. We are left to speculate as to why the mortgagor would spend the zillion dollars necessary to fight this case and even take it to the court of appeals level rather pay the extra insurance premium. Therein, certainly, lies a tale.

It is also intriguing that the appeals court paid so little deference to the opinion of the trial court as to the meaning of the mortgage language. To be sure, the appeals court's approach was simply to read the documents, and hence such issues as demeanor of witnesses would have no bearing on the case. Nevertheless, the issue of interpretation of the documents is still a question of fact, and, notwithstanding the fact that this is an appeal from an equitable proceeding, appeals courts still tend to abide by the reasonably exercised discretion of the trial court.

The trial court had concluded that it made no sense to expect that the junior mortgagee did not expect insurance equal to full coverage of the secured debts. The court of appeals, in reversing, acknowledged that documents should not be interpreted so as to lead to absurd results, but nevertheless pointed out that the express language of the mortgage required only insurance equal to the secured amount, and apparently did not view it as absurd that the junior mortgagee would require insurance in an amount less than the amount of the first mortgage.

Comment 1: We are told nothing of the first mortgage, but it would be a rare mortgage indeed if it did not require that insurance proceeds would be used either to pay off the mortgage debt (or possibly to rebuild if funds were available). Thus, under the court's interpretation, it is unlikely that the insurance required by the second mortgage would ever really do the second mortgagee any good.

It's hard for the editor to imagine a circumstance where the court's reading of the parties' intent would make any sense. The appeals court interpretation is the "absurd result" that the court indicates that it is charged to avoid.

Comment 2: Generally speaking, the editor concurs that parties should live with the language of their instruments. Nevertheless, the instruments should be given the meaning that the parties obviously intended. What might look at first like a perfectly plain reading might in context lead to absurd or inappropriate results. If the context lies within the four corners of the instrument, then the instrument should not be read to reach absurd conclusions. The document is ambiguous, and parole evidence should be taken to interpret it.

Comment 3: Having said the above, the editor admits that careful lawyering would have avoided the error. The drafters of the junior mortgage obviously pulled first mortgage language "off the shelf" and thoughtlessly used it in an inappropriate circumstance. There is some merit to the argument that the parties ought to live with the results of their carelessness. Certainly the mortgagee usually is in the position to dictate the terms of the mortgage, and consequently it is difficult to be too generous when the mortgagee makes an error in its dictation.

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